If you have any interest in starting a hedge fund
, it is imperative to know the pros and cons of doing so, as well as the finer details for moving in the right direction.
When you start a hedge fund, you will be faced with a variety of challenges as well as many steps that are required to ensure that you are on the right path from the start.
Although there are similarities with starting another type of business, since you are dealing in the financial sector, while also working with other people’s money, there are additional steps you must take.
It is easy to look at the top hedge funds
, such as Dafna Capital Management
, Artis Capital Management
or even T. Boone Pickens' firm (Pickens pictured above), and believe that they were always on top of the world. However, this is not the case. These hedge funds, just like any others, started at the beginning and worked their way up to billions of dollars in holdings.
Five Tips for Starting a Hedge Fund
The following five tips will come in handy if you are preparing to start a hedge fund:
1. Create your fund entity and choose a name. Just like any type of business, you need to legalize your operation. The type of entity that you choose is based on your location, as well as what you feel is best from a tax point of view. In the United States, the most commonly used entities include: corporations, limited liability companies, trusts, and limited partnerships.
2. Become an investment advisor. If you are interested in starting a hedge fund, there is a good chance you have already met this requirement. If not, now is the time to do so. Hedge funds with 15 or more investors must register with the Securities Exchange Commission.
3. Create a sales and marketing plan. Just because you start a hedge fund doesn’t mean people are going to trust you with their money. You must have a sales and marketing plan that will help you raise assets. There are many sources of investors, including: seed capital providers, high net worth professionals, financial advisors, wealth management offices, and family and friends.
Simply put, if you don’t market your hedge fund nobody will know it exists. Subsequently, you cannot expect much success.
4. Hire an experience hedge fund attorney. This is one of the most important steps you will ever take as it will allow you to avoid common pitfalls of starting a hedge fund. Staying compliant is a must, and your attorney can ensure that this is never a concern.
5. Register your fund with the Securities Exchange Commission. While this is something your attorney will discuss with you, it is a step you cannot afford to put off. In addition to registering with the Securities Exchange Commission, you will need to do the same in each state your fund will be offered.
When starting a hedge fund, the five steps above will allow you to cut through the clutter and move closer to your goal.
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